Is Starbucks in an Existential Wilderness?

What is Starbucks? Is it a momentary retreat from the stress of work and life? Is it a fast-service coffee chain? Is it a snack shop? Is it a luxury coffee manufacturer? What is Starbucks reason for existence?

For years, Starbucks was the case study for using strategic focus to drive growth and manage prices. Yet, as a recession kicked off in 2008, it seems they began to flounder in the wilderness as CEO Howard Schultz touted a focus on the core while executing outlet closings, layoffs, promotions featuring lower priced products, and the introduction of instant coffee.

In this case study, we compare Starbucks’ (SBUX) recent actions with those of a previous high-flyer: Krispy Kreme (KKD).

Krispy Kreme

In 2000, Krispy Kreme was a burgeoning leader in the doughnut market. For customers, the thought of “Hot Now” Krispy Kreme doughnuts was reminiscent of Elvis, doughnut theater, and free samples. Transplanted southern humorist Roy Blunt Jr. gushed in the New York Times that “when Krispy Kremes are hot, they are to other doughnuts what angels are to people.” Store openings were welcomed by city mayors and radio hosts alike as a sign of urban health. And, when Krispy Kreme would open new outlets, people would line up over 100 deep. Once they walked in, smell, sight, sound, and taste would all be activated to the simple delight of a good doughnut.

At its core, Krispy Kreme faced an existential strategic decision in the intervening years. Would Krispy Kreme continue to be a “doughnut theater” or evolve into a “doughnut supplier”?

Revenue growth, corporate coffers, and stock performance had been fueled by outlet openings during the prior decade. By 2004, Krispy Kreme had opened 427 stores with the help of franchisees. Each store featured the classic “Hot-Now” flashing sign, machines spraying glaze on freshly baked doughnuts, and a luxurious front counter where one could enjoy a doughnut with a cool chug of milk. Each opening of a new franchise outlet would bring $770,000 in equipment sales alone plus future revenue through the sales of proprietary doughnut dough tied to franchise performance.

With hubis, Krispy Kreme began experimenting with other forms of retail in the early part of the 00’s decade. They had managed to develop relationships with over 20,000 supermarkets, convenience stores, truck-stops and such. With an expanded number of outlets to enable customers to purchase a moment of heaven, many outsiders and perhaps even some insiders expected Krispy Kreme to become the new standard for doughnuts.

Krispy Kreme faced a challenge in its ability to deliver the entire promise of the Krispy Kreme experience at the non-store retail outlets. The Krispy Kreme theater could not be reproduced at a truck-stop. Gone were the smells wafting in the air of fresh baked doughnuts, the terrazzo floors, and the smiling counterperson offering free samples. In its stead was an offer to buy beef jerky and gasoline to go with that doughnut which would normally be a few hours old and not quite as much like an angel’s kiss. Hardly a similar experience. Or, worse, a consumer trade-off between a box of Krispy Kremes baked offsite at a corporate plant, versus Sarah Lee Doughnuts which were better engineered for shelf life, or store doughnuts made a more recently at the grocer’s bakery.

The existential challenge was real however. A market strategist could not realistically go to his CEO, much less stock analysts, and state “No! We should stop selling our product in these 20,000 retail outlets and concentrate on this handful of 427 corporate and franchise outlets.” Revenue from non-store retail outlets was no-doubt much higher than that from Krispy Kreme doughnut shops.

Unfortunately, in 2004, this existential challenge became real. The new “retail outlet” relationships slowly ate away at the value of a franchise license by taking sales away from a franchise licensee and transferring them to a corporate bakery. As a result, many of the franchise outlets closed. Perhaps anticipating this causal relation, the executives of Krispy Kreme made a questionably ethical decision to purchase back franchise licenses from their own corporate executives.

With fewer Krispy Kreme outlets, consumers did not benefit from the experience of doughnut theater.

What are the results of Krispy Kreme’s decision to seek fast growth through non-store retail outlets rather than slow-growth through corporate and franchise stores? Ask yourself, how is relevant Krispy Kreme to you today? Do you look forward to having a Krispy Kreme doughnut or is it just another alternative snack available at a store? Or, simply look at the stock numbers. From reaching a high of $48.90 in August of 2003, Krispy Kreme now hovers around $1.50 per share – a 97% loss of value.

Experience Marketing

Krispy Kreme, like Starbucks, saw growth fueled by the delivery of an experience. Yes, the doughnuts are good at Krispy Kreme, and most would argue that the coffee at Starbucks is above average. Yet, it is hard to argue that people really go for the food and the coffee. They seek these outlets for something greater than product delivery. They seek an experience.

Like American Girl Store or Nike Town, Krispy Kreme and Starbucks both delivered an experience, not just a product. Customers seeking the Starbucks experience know they can get an acceptable cup of coffee elsewhere, but would find it difficult to replicate the experience of wafting coffee smells, borrowed linguistic idioms for small medium and large, and “baristas” trained and focused on brewing the perfect cup of coffee.

In a hectic day of crying children and bosses alike, when collecting one’s thoughts is culturally accepted if connected with a quick walk for a cup of coffee, where a person will choose to demonstrate a moment’s compassion by seeking to do nothing more than ensure that you get a perfect cup of coffee mixed in the precise manner you seek, ordered in a secret language that delivers a “doppio macchiato half-caf skim foam,” $4 is cheap for momentary psychotherapy. For relief like this, Starbucks isn’t selling coffee, it is selling an experience.

Starbucks Experience?

If we accept that Starbucks is an enterprise built on the sale of an experience, then what should we make of its current practices.

Starbucks launching of its Via instant coffee is hardly sticking to its core. Customers who seek Starbucks for that perfect moment of retail therapy will not find it in a package of instant coffee, regardless of how good it is. Yet, try to tell CEO Schultz or the many stock analysts of Starbucks, “No! We should not seek growth by entering a new sales channel with a blockbuster new product.” It wouldn’t be prudent.

Likewise, an effort to reposition Starbucks’ value proposition of downstream and in-line with other coffee purveyors hardly reinforces the concept of the Starbucks experience. Yet again, try to tell a CEO nor stock analysts during a recession “No! We should not keep our pricing in-line with consumers’ willingness to spend.” Again, it wouldn’t be prudent.

Furthermore, the new bundle of breakfast sandwiches and coffee, priced competitively to a McDonalds’ Value Meal, is hardly a continued focus on the coffee experience if the smell of toasting bread, warming cheese, and smoked ham interferes with that of the coffee. Yet again, it wouldn’t be prudent to say “No!” to CEO Schultz nor the stock analysts on this issue either.

Finding its Way

So, has Starbucks lost its way? While I have reservations with respect to its Via product launch, I am inclined to say that it is muddling forward. Indubitably, finding ways of making “Yes!” work is far better than repeating “No” simply because it is different. Companies must evolve to stay relevant.

The market has changed and consumers are focusing on cost savings. Starbucks has long offered affordable coffee beverages. Highlighting these options does not destroy the coffee experience. Perhaps Starbucks could connect the two better in its advertising, such as having the CEO on screen stating “we are all in this together, we are going to stand by you throughout your hectic day with a hot coffee to stimulate America.”

Likewise, offering bundles in largely fixed costs enterprises is a proven means to capture marginal customers and generate increased revenues and profits. Perhaps Starbucks can manage this coupling better by ensuring that the food selections never interfere with the coffee smells.

Neither the price repositioning nor the bundling in themselves need destroy the Starbucks experience which has driven consumers and profits. But let the story of Krispy Kreme be a warning that not all developments are by definition good. If Starbucks allows its developments to become value destroying diversions like Krispy Kreme did with its retail outlets, we will soon be unable to find a reason for Starbuck’s existence. To prevent such an existential crisis, Schultz must keep hammering away at communicating the meaning of Starbucks so it can find its way.

Via represents a threat to both the Starbucks brand meaning and marketing focus as supermarket marketing is not the same as in-store marketing. Perhaps it would be better suited if launched under a different brand such as Ishmael or Queequeg, but I will leave that issue for the Moby Dick aficionados.

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About The Author

Tim J. Smith, PhD, is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right (Wiley 2016) and Pricing Strategy (Cengage 2012). At Wiglaf Pricing, Tim leads client engagements. Smith’s popular business book, Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, was noted by Dennis Stone, CEO of Overhead Door Corp, as "Essential reading… While many books cover the concepts of pricing, Pricing Done Right goes the additional step of applying the concepts in the real world." Tim’s textbook, Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, has been described by independent reviewers as “the most comprehensive pricing strategy book” on the market. As well as serving as the Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, Tim is a member of the American Marketing Association and American Physical Society. He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago GSB.

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